For every good stock you can buy, there's usually at least a couple of bad ones you are better off avoiding. Stocks that are falling in value can seem like tempting buys since they look cheap, but often they're declining for a good reason. If a stock is down more than 80% over the past five years, that's probably a good sign that there's something seriously wrong with the business. And unless you have an extremely compelling reason to invest in it and believe that it will turn things around, you probably are better off avoiding it.
That brings me to a stock I could never envision buying, and that's cannabis producer Tilray Brands (TLRY +1.03%). The stock has fallen more than 95% during the past five years. And although many cannabis investors still remain bullish on it, the business is incredibly risky. Here's why if I were to make a never-buy list, Tilray Brands stock would definitely be on it.
NASDAQ: TLRY
Key Data Points
The company operates in a market where there's limited growth potential
To be fair to Tilray, I would never buy any Canadian cannabis stock. The simple reason is that the market is has too many marijuana producers, driving up supply and pushing down prices. This is why you see Tilray getting into the alcohol industry and focusing on the international cannabis markets; the growth potential in the Canadian cannabis market just isn't appealing at all.
The end result is that generating significant revenue growth becomes difficult. Consider the company's most recent results as an example. For the period ended Nov. 30, Tilray reported $67.1 million in revenue from its cannabis business. But two years earlier, its cannabis revenue during the same period was $58.8 million. Over a two-year period, Tilray's cannabis revenue only grew by 14%, and that's with the help of acquisitions.
Tilray's management has often painted an inflated picture of the business
What makes Tilray an even more unappealing investment is its management. I'm wary of companies that grossly overstate their long-term expectations and can be setting up shareholders for disappointment down the road. That's what I felt back in 2021 when the company's Chief Executive Officer Irwin Simon "mapped out a path" for the company to get to $4 billion in revenue by 2024.
Tilray is nowhere near that mark today. It's at an annual run rate of less than $800 million right now. And I'm not just speaking with the benefit of hindsight here. I was skeptical about Tilray's projection when it first came out, noting how incredibly optimistic it was for management to rely on so much revenue from the U.S. and European markets.
The icing on the cake came in 2022 when the German government said that Tilray was not accurate in issuing a press release in which it said it held a "roundtable" discussion with German officials about legalizing cannabis in the country. It was a prime example of how Tilray's management can get ahead of itself.
Even if you can stomach the risk, there are much better stocks to buy than Tilray Brands
Tilray Brands isn't a great business to own. If you're bullish on marijuana and want exposure to the long-term opportunities in the industry, then a better option may be to simply invest in multistate marijuana operators that are already operating in the U.S. market. Investing in Tilray based on the hope that it might be able to enter the U.S. one day is a much riskier strategy, and that's what many cannabis investors who buy the stock are likely banking on today.
There isn't a strong and compelling reason to believe that Tilray will find a better path forward. Acquiring companies can help manufacture more revenue growth, but it won't necessarily make Tilray a better investment. And a lot of the growth it's generating these days is due to acquisitions. Tilray isn't a good growth stock, and it comes with too much risk for it to be worth taking a chance on.
